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Terms and Transcript by ChatGPT
Defined Terms and Jargon
- Basis Point (bps) – A unit of measure for interest rates or market movements equal to 0.01%.
- Fibonacci Retracement Levels – Technical analysis tool using horizontal lines at key percentage levels (such as 61.8% or 78.6%) of a prior price move to identify potential support or resistance levels.
- Bearish Engulfing Candle – A candlestick chart pattern signaling potential reversal, where a large downward candle fully engulfs the previous day’s upward candle.
- Equal Weight Index (RSP) – An index that gives each stock the same weight, contrasting with capitalization-weighted indexes like the S&P 500.
- Market Breadth – A measure of how many stocks are advancing versus declining, used to assess the overall market’s health.
- McClellan Oscillator – A market breadth indicator that measures the difference between advancing and declining issues over time.
- Summation Index – A cumulative measure derived from the McClellan Oscillator, often used to identify long-term trends in market breadth.
- TGA (Treasury General Account) – The U.S. Treasury’s account at the Federal Reserve, used to manage government cash flows.
- Reserve Balances – Deposits held by banks at the Federal Reserve, a component of system liquidity.
- Overnight Repo Rate – The interest rate charged on short-term borrowing agreements where securities are sold and later repurchased.
- SOFR (Secured Overnight Financing Rate) – A benchmark interest rate for U.S. dollar-denominated loans and derivatives, based on overnight repo transactions.
- Credit Spreads – The difference in yield between corporate bonds and comparable U.S. Treasury securities, reflecting perceived risk.
- German–Italian Yield Spread – The difference in yields between German and Italian government bonds, often viewed as a gauge of eurozone credit risk.
Fully Edited Transcript
The S&P 500 opened the day about 60 basis points higher, but those gains quickly evaporated, and the market closed down roughly eight basis points. The key technical challenge emerging now is the market’s inability to break through the 61.8% Fibonacci retracement level. We briefly reached the 78.6% retracement level before pulling back and settling near 61.8%.
This pattern raises the possibility of a trend change. It’s not unusual for markets to retrace 61.8% or 78.6% of a move before reversing, but confirmation is needed before turning decisively bullish or bearish. From a bearish perspective, the clearest confirmation would be a break below the 6,200 support level in the coming days. That would strongly indicate a potential turning point for the S&P 500.
My bearish lean stems from last week’s discussion of the bearish engulfing candle on the weekly chart, which appeared on solid volume. Historically, these setups have preceded meaningful pullbacks. While the S&P 500 is up about 1.6% this week, nothing has occurred to invalidate the candle. If the market rallies sharply and closes above 6,400, the bearish case would be negated, and the outlook would need to be reassessed. For now, 6,400 serves as the bearish invalidation level, while a break of 6,200 would validate the bearish scenario.
Overall, the market’s inability to mount a strong rally suggests this is more of a retracement than an impulsive move higher. The equal-weight index (RSP) has been in more of a downtrend, underscoring that gains are concentrated in a small group of mega-cap names. When overlaid with the SPY, the divergence becomes clear.
Breadth indicators confirm this weakening backdrop. While I don’t often focus on breadth due to its lagging nature and inherent noise, the past two days have shown negative readings. The New York McClellan Oscillator has been negative since mid-July, and the Summation Index has turned lower, currently at 548. A move below 500 would reinforce the case for market exhaustion and potential downturn.
Liquidity trends are also important here. The IWM (Russell 2000 ETF) has lagged, struggling to break above the 225–226 zone. This weakness coincides with a Treasury General Account (TGA) refill. Last Friday, the TGA stood at roughly $500 billion. On Monday, it dropped by about $120 billion but has since been rebuilt. Today was a major Treasury bill settlement date, and tomorrow’s data should reflect another increase.
Next week will see three more settlement dates, likely pushing the TGA higher and reserve balances lower. The target is about $850 billion—February’s level—meaning roughly $400 billion still needs to be added. As the TGA rises, liquidity drains from the market, often reflected in rising overnight repo rates and the Secured Overnight Financing Rate (SOFR). This environment could continue to pressure smaller-cap and equal-weight names relative to the broader indices.
Internationally, an interesting development is the narrowing yield spread between German and Italian 10-year bonds, now at just 81 basis points. This may help explain why credit spreads remain tight. However, the narrowing could stem from Germany issuing more debt for infrastructure and defense, pushing its yields higher, while Italian yields remain stable or decline. This fundamental shift in Europe could be sending a misleading signal about U.S. risk appetite.
If this spread begins to widen again, it could pressure U.S. corporate spreads as well. For now, it’s worth monitoring as part of the broader risk assessment toolkit.
Disclaimer
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.